The company bought its major assets off Sons of Gwalia back in 2006 – when the latter went bankrupt – and has done well to develop the assets and move from an explorer to a producer.
SAR’s key assets are located in the South Laverton mining district, 120km North-East of famed gold mining town Kalgoorlie, in Western Australia. This includes around 200 granted tenements and applications pending spread over 2,500 square kilometres.
Since purchasing these assets, SAR has spent money exploring the tenements and developing the projects to production.
The company completed a Definitive Feasibility Study on the South Laverton gold project in December 2008 and started producing gold in early 2010.
Having started production in April last year, SAR has achieved strong production quite quickly and established itself as an enticing small producer.
The company produced 111,163 ounces of gold in FY11, its first full year of production, at an average cash cost of $738 an ounce.
SAR has forecast production of around 125,000 ounces in FY12 at costs of around $700-$750 an ounce. So far FY12 is off to a solid start, with the company recently releasing its September quarter Activities Statement. Production of 31,790 ounces at cash cost of $730 was right in light with guidance.
By de-watering some of its flooded pits, SAR hopes to ramp up production to over 160,000 ounces a year by 2015. Management has proven to be conservative and reliable so far, offering some reassurance in what is a speculative sector.
Saracen Mineral Holdings has managed significant upgrades to its gold resources and reserves, presently standing at around 3,300,000oz and 880,000oz respectively. Most of the reserves are open-pit, which allows for easier and cheaper mining.
The sizeable resources and potential underground mining pave the way for a long mine life, while the company has extensive exploration potential to upgrade this further.
The hunt for Red October
SAR’s has planned to spend $35 million on exploration activities in FY12, a sizeable budget given the size of the company.
The company recently completed a placement, raising $50.2 million and helping the company to end the September quarter with $60.3 million in net cash and no debt. A share purchase plan and subsequent placement have raised a further $15 million since.
Together with cash generated from production (almost $10 million last quarter), SAR will not need to raise significant fresh capital to fund this.
Much of SAR’s exploration efforts will be in exploring its Red October project. The company expects to have completed dewatering the pits shortly, to be followed by underground development work.
Previous drilling results have confirmed the continuity of ore body at Red October and further exploration efforts could lead to significant resource upgrades relatively quickly.
Production from Red October is expected to commence in FY12, but potential major exploration success could provide a major share catalyst before then.
SAR only started gold production just over 18 months ago but is already generating output of around 125,000 ounces a year.
Incremental production upgrades could come in the next few years, but the significant upside potential comes from the development of its Red October operation.
While SAR offers significant exploration upside, its existing production provides extra protection, and suggests that the market could re-rate the stock and push SAR shares much higher than current levels.
SAR is a defiantly a stock to watch.